Covered Bonds

Last week saw a landmark event in covered bonds, with the first two Australian deals coming to market. But the new asset class has arrived stillborn. A rush to issue in spite of weak conditions has ruined the prospects for other deals.

Following the January 2010 implementation of its revised counterparty criteria and the loss of market share that this would have implied, Standard & Poor’s has gone back to the drawing board and taken a more flexible approach. But the principal is the same as, in essence, the higher the counterparty rating, the less onerous the collateral posting requirement.

Commonwealth Bank of Australia has confirmed that it is monitoring the market, and though this does not constitute a delay to its inaugural euro benchmark, it may in practice amount to that, given difficult market conditions. ANZ and Westpac’s dollar deals both continue to trade soft amidst talk that leads are holding significant dollar covered bond inventory.

The ECB’s second purchase programme was one week old last Friday, having taken its first faltering steps on November 11. Its progress has been far from heartening.

The Australian regulator’s proposals on Basel III liquidity reforms could privilege covered bonds at the expense of RMBS, Moody’s has said.

Realkredit Denmark kicked off the Danish auction season on Monday, with sales in both euros and Danish kroner.

Despite hopes that the result of Spain’s general election would bolster sagging equities and pull in widening government bond yields, market conditions appear prohibitive at the start of a potentially shortened week.

Regulation of rating agencies, as outlined by the EU commission, could have negative repercussions for covered bond issuers, according to Deutsche Bank analysts.

UniCredit has overhauled its funding strategy to insulate itself from hostile wholesale markets, its head of funding said this week. With the senior unsecured market shut even for top tier issuers, the bank announced a new funding strategy for 2013-2015 with an “embedded” policy of no issuance in senior unsecured.

The much vaunted Australian covered bond deals priced by Westpac and ANZ this week have not performed well. Bankers away from the deals say the process has been a sham and the deals’ poor performance bodes poorly for follow-on transactions. But those who worked on the trades say the wider market backdrop turned significantly negative in the last 48 hours, with bids becoming excessively defensive across the entire financial institutions sector, and the fact that both deals were oversubscribed and well placed is a positive development.